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Consider a bond as an alternative to a letter of credit COMMERCIAL SURETY For more than a century, we have met the surety needs of individuals and businesses through our steady, stable approach. Top rating agencies have consistently provided our primary underwriting company, Travelers Casualty and Surety Company of America, with high marks for financial strength. Types of letters of credit There are two broad types of letters of credit (L/C): 1. Commercial L/C – used as a means of paying sellers for goods purchased; both parties expect that the letter will be drawn upon. 2. Standby L/C – not expected to be drawn upon; used to support financial or performance obligations. When can a bond be used in place of a letter of credit? Whenever a standby L/C is provided by a bank, there may be an opportunity to provide a surety bond in place of the letter of credit. • paid loss retro programs • performance obligations • workers compensation self insurers’ obligations • security for appeals of a court decision • international obligations What are the advantages of using a bond vs. a letter of credit? Credit capacity: An L/C ties up the company’s credit capacity, thus reducing financial flexibility. Surety bonds are not credited against a company’s bank line. Covenants: Banks may place restrictive covenants on the client in return for extending a bank line of credit, or they may require extensive financial reporting. Surety companies typically offer more flexibility. Security: Banks may choose to take a security interest in the client’s assets. This security is required to be perfected through the filing of public documents (UCC filings) that publicize their secured lender status. A surety is generally an unsecured creditor. A UCC filing is rarely made. Default defenses: A bank L/C is a demand instrument; a surety bond typically is not. An L/C may be drawn down at any time, without any reason; the company has no defenses. With a surety bond, the surety requests proof of a company’s default from the obligee and works with the principal to identify defenses. This protects the principal from the obligee taking possession of the bond proceeds without merit. Claim handling: Travelers has a professional, dedicated claims staff available to handle disputes and to assist in the claim resolution process. Banks do not have a claims staff, which requires a client to resolve disputes on its own. Rates: L/C rates can be volatile. The L/C rate may include a commitment fee or utilization fee, as well as issuance fees, in addition to a stated rate. Surety rates tend to be stable and are directly tied to the credit quality of the principal and to the types of obligations bonded. travelers.com/commercialsurety Travelers Casualty and Surety Company of America and its property casualty affiliates. One Tower Square, Hartford, CT 06183 This material does not amend, or otherwise affect, the provisions or coverages of any insurance policy or bond issued by Travelers. It is not a representation that coverage does or does not exist for any particular claim or loss under any such policy or bond. Coverage depends on the facts and circumstances involved in the claim or loss, all applicable policy or bond provisions, and any applicable law. Availability of coverage referenced in this document can depend on underwriting qualifications and state regulations. © 2013 The Travelers Indemnity Company. All rights reserved. Travelers and the Travelers Umbrella logo are registered trademarks of The Travelers Indemnity Company in the U.S. and other countries. 59867 Rev. 9-13